Asalota Das, whose husband, Shibshankar, was murdered in the village of Chotokalsingbanga. Photograph: Jason Burke

The site is a patch of arid wasteland, ringed by a half-built wall, just off the potholed road from the flyblown town of Midnapore in West Bengal. There is little to indicate it is the cause of a murderous gang fight pitting communists, Maoists and allies of India's ruling government against one another in a battle for cash, power and resources.

A £30m steel plant is due to be built here by Jindal, India's biggest privately owned producer. The aim is to bring jobs and prosperity to the impoverished town of Salboni, but the plant's arrival has brought a wave of kidnapping, murder, arson and intimidation.

There is little trace of a new "India shining" in West Midnapore district. Its 3.5 million people have some of the highest rates of illiteracy in the country. There are only 3,000 under-trained and under-equipped police officers here, who are largely occupied guarding camps or making desultory patrols in areas most affected by the local Maoist guerrillas. Senior police intelligence officers in Kolkata, the state capital, estimate that between 90% and 95% of the relief and development funds channelled to rural areas are stolen. In the towns, the proportion sinks to "only" two-thirds.

When Jindal Steel announced it was to build the plant, there was much excitement. The decision was partly a result of generous incentives offered by the government of West Bengal, dominated by the Communist party of India (Marxist) for 33 years, which hoped to bolster its wavering hold on power.

But politics has brought violence, too. The body of Shibshankar Das was found sprawled on the single road through the village of Chotokalsingbanga on 8 March, close to his mud-walled, single-room homestead. A note pinned to the body said "police informer". In fact Das, a 35-year-old labourer trying to support a family on 70 rupees (£1) a day, was almost certainly an innocent, killed as an example.

"He was not a political person. We were poor, but things were OK," said Das's brother, Kamal. Asalota, his widow, sobbed quietly. "He never harmed anyone. I have no income. I used to weave baskets and he took them to market, but now he has gone. How can I pay to send my children to school?" she asked.

On a rope bed outside the home, beside the family's one cow, Das's 13-year-old daughter studied the newspaper carrying the front-page picture of her father's corpse in stunned silence.

Das had found himself caught in the complex three-way battle begun by local politics and the coming of the steel plant. In West Midnapore, political office means power. Whoever controls the neighbourhood around the site will control not just the workforce but the unions, the contractors, the development deals and the businesses the plant will generate.

The Communists, who have been in power for so long and are now flagging badly, are battling it out with the All India Trinamool Congress, a new party that makes up for its lack of ideology with populism and opportunism. This contest will climax in state assembly elections next year, and in Salboni the war is already well under way. "Only 1% of the supposed informers killed really are informers," said Superintendent Manoj Verma, chief of the district police. The real reason for Das's death is to be found in a neighbouring house where the family of Jagneswar Mahato, a small-time businessman and the local Trinamool Congress leader, was also grieving. Mahato, 38, was abducted last month and has probably been killed. His wife squatted in the dust as his brother dully retold how Mahato was last seen, covered in blood, being dragged away by Communist party thugs.

The Trinamool Congress won the village of Chotokalsingbanga from the Communists at the last local elections, largely because of the corruption of Communist officials. A day after the Observer visited, two more villagers were abducted. The police have registered 70 kidnappings in the past year and more than 160 "informers" have been killed.

West Midnapore has long been a base for Maoist insurgents – described by the Indian prime minister, Manmohan Singh, as the greatest internal threat to India in 60 years. "By creating a violent environment [in Salboni] they will be able to extort money from construction contractors [on the steel plant] to start with and then everyone else who follows," said Verma.

Contacted by the Observer, the local group responsible for Das's murder said they were "simply following orders".

There is one name that the villagers, almost all illiterate, rarely speak aloud: the Harmath, as the armed Communist party militias are known. The people of Vursa village, like those of Chotokalsingbanga, voted out the Communists last year. The Harmath first visited in December. Driving between the huts and cattle pens, they burned rice stores and this year's seed stock, and torched homes, stole jewellery and clothes and abused women. "We are an opposition pocket in a Communist area. We are day labourers, poor people. We have no defence," said Butnath Ghosh, 70. Repeated raids eventually drove the villagers out. They returned only a few weeks ago. "Without working we cannot eat. We had to return. But we are frightened," Ghosh said.

Across the district the same tales of violence and intimidation linked to the Harmath are told. "We live under a reign of terror," said one salesman in the town of Chandrakona, which has also seen a series of kidnappings.

Dipak Sarkar, head of the West Midnapore Communist party, said the militias were "a people's defence force to save their own lives and property. We help people resist by organising people, giving them courage, mobilising them," said Sarkar at the party's district headquarters. "But any weapons they might have are their own."

He denied any corruption or that the Communists might gain at the expense of locals. "When the party is helped, the people are helped," Sarkar said. "And the party is the people."